national income concepts-first 2

8/22/2019 National Income Concepts-first 2

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National Income Concepts


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National income or national product

National Income and Related Aggregates

Is defined as the total market value of all the finalgoods and services produced in an economy in a

given period of time. This suggests that labor and capital of a country,

working on the natural resources produces certainnet amount of goods and services, the aggregatesof which as known as national income or national

product. There are many concepts of national income which

are used by different economists and all of whichare inter-related. These concepts are:


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1. Gross National Product at Market Price (GNP mp) GNP mp refers to the total value of all the final goods

and services produced during the period of one yearplus the net factor incomes earned from abroadduring the year.

The word gross is used to indicate that the totalnational product includes in it that part of productwhich represents depreciation.

Depreciation means the wear and tear of themachinery and other fixed capital during the processof production.

GNP includes the economic activities of all theresidents of a nation whether operating within thecountry or outside it.


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It takes into account the incomes which the residents get fromrest of the world and at the same time it excludes those incomeswhich arise from the economic activities within the country buthave to paid out to the non-residents

GNP being the monetary measure of all final goods and services

produced, is widely used as an index for judging the performanceof an economy.

2. Net National Product at Marker Price (NNPmp): price is equal to GNP minus the charges of depreciationand replacements, where depreciation represents the values offixed capital consumed during the process of production.

NNP mp = GNP mp Depreciation. The concept of NNP isimportant because it gives an estimate of the net increase in theoutput of final goods and services.


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3. Net National Product at Factor Cost (NNP fc) orNational Income:

NNP fc or national income is equal to the sum total of factorincomes received by the factors of production during theyear. It is equal to the sum of rent, wages, interests and

profits in a given year. The sum total of incomes of the factors of production is

known as national income or net national product at factorcost.

Thus, the national income is equal to the NNP at mp minusrevenue of the government by way of indirect taxes plussubsidies provided by the government to the businesssector.

NNP fc = NNP mp {Indirect taxes + Subsidies}(or)

NNP fc = NNP mp net Indirect taxes. taxes


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4. National Income at Current Price and Constant Price: When the value of goods and services is found out by multiplying the

quantity produced during one year by the prices prevailing in that year, wecall it National income at Current Prices.

On the other hand, when the value of goods and services is calculated bymultiplying the quantity during one year with prices of the base year, we

call it National Income at Constant Prices. Example: (1) q1 is the quantity of final product in year 1980 and p1 is theprice of that year.

Then, the value of the final product I = q1p1 Similarly, q2 is the quantity of final product II in year 1980 and p2 is the

price of that year. Then, the value of the final product II = q2p2 If we add up the value of all final goods and services produced, we get

National Income at Current Prices. So, National Income at Current Price will be: q1p1+q2p2+ .qnpn =

NI at Current Prices. Prices


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(2) Suppose we want to compare the national income figures of1980 and 1990, we may find that the national income in 1990 ishigher than that of 1980.

This increase in income may be due to (a) increase in output (b)

increase in prices may be higher in 1990 than 1980. To get the exact increase in real income, we need to multiply the

quantity of goods produced in 1990 with the 1980 prices. Thisshows: National Income at Constant Prices: Quantity of Currentperiod x Prices of Base period.

Formula for Real National Income:

Money National Income (Current year) x Price Index of Base year___________________________________________________

Price Index of Current year


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Measurement of National Income: The methods of estimating national income

of a country depends upon the availabilityof proper statistics.

This can be viewed from three interrelatedangles, such as, in terms of production,income, and expenditure.

These three terms are broadly related to

GNP, GNI and GNE respectively. The ideal national income equation shows

that National Income or NI=GNP=GNI=GNE.


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To measure the national income of a country, we use three

different methods, such as:(a) The product method(b) The income method

(c) The expenditure methodThe Product Method The production method measures national income as the sum of

net products produced by the production units in the given period.

Therefore, the production method involves the following steps:(i) Identifying the production unit

(ii) Estimating their net products(iii) Valuing the goods and services(iv) Estimation of net income from abroad


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The next step in the production method is theestimation of net product of each sector.

This comes from the Gross products minus the

intermediate products minus the depreciation duringthe process of production.

NNP = GNP Intermediate products Depreciation.

The total estimates would give us Net DomesticProduct at factor cost.

The addition of net income from abroad to this totalwould give us net national income at factor cost orNational Income.


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The Income Method The income method measures national income as the sum

total of factor income shares accruing to the factor owners. Factors of Production: Land, Labour, Capital and

Organization.

Factor incomes: Rent, Wage, Interest and Profit. One can easily aggregate all the factor incomes over a

period of time and this aggregate figure is known asnational income at factor cost.

There are major additions and deductions to the nationalincome accounting.

Additions: Income from foreign sectors in the form of rent,profits etc. Deductions: Incomes from all illegal activities: theft,

robbery, smuggling, child labor, etc. Incomes to the foreign sector acting in domestic sectors.


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Comparison between Product method and Income method:

NI fc = NI mp Indirect tax + Subsidies. For the sake of convenience, economists suggests that the

Product method is for Primary sector and the Income

method is for tertiary sectors.The Expenditure Method Because of identical relation the GNP=GNI=GNE, the

expenditure of one becomes the income of other. Hence,the GNE is calculated which will be identical with GNI.

The Expenditure in the Economy can be broadly divided into

three types, such as,(i) Consumption Expenditure(ii) Investment Expenditure(iii) The pure Govt. Expenditure


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Consumption expenditure provides direct satisfaction

where investment expenditure is necessary toincrease the productivity of the nation.

Pure Govt. expenditure is necessary for maintenanceof law and order situation and providing theinfrastructural facilities to the nation.

In detail, all expenses are again divided into fivedifferent categories:

1. Private Consumption Expenditure

2. Public Consumption Expenditure3. Private Investment Expenditure4. Public Investment Expenditure5. Pure Government Expenditure


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Comparison of three Methods:

The product method is very suitable for the primarysector such as agriculture, industries etc.

The income method is appropriate for the tertiary and

service sectors. The Expenditure method is only for the calculation of

identical relationship between three methods. It isbecause we may not get the details of all expenditurecorrectly. Neither it is possible nor it is desirable to

reveal all types of expenditure. In fact, the expenditure method is only to complete

the identical relationship i.e.

GNP=GNI=GNE=NI


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PRICE INDEX

A price index (plural: price indices or price indexes) is anormalized average (typically a weighted average) of

prices for a given class of goods or services in a given region,during a given interval of time. It is a statistic designed to help tocompare how these prices, taken as a whole, differ between time

periods or geographical locations.

Price indices have several potential uses. For particularly broadindices, the index can be said to measure the economy's pricelevel or a cost of living. More narrow price indices can helpproducers with business plans and pricing. Sometimes, they can beuseful in helping to guide investment.

Some notable price indices include: Consumer price index Producer price index GDP deflator


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Consumer Price Index

A consumer price index (CPI) is a measureestimating the average price of consumergoods and services purchased byhouseholds. A consumer price index

measures a price change for a constantmarket basket of goods and services fromone period to the next within the same area(city, region, or nation).

It is a price index determined by measuringthe price of a standard group of goodsmeant to represent the typical marketbasket of a typical urban consumer.


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Producer Price Index

A Producer Price Index (PPI) measuresaverage changes in prices received bydomestic producers for their output. It isone of several price indices.

Its importance is being undermined by thesteady decline in manufactured goods as ashare of spending.

The Producer Price Index (PPI) programmeasures the average change over time inthe selling prices received by domesticproducers for their output.


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GDP Deflator

The GDP deflator (implicit price deflator for GDP) is ameasure of the level of prices of all new, domesticallyproduced, final goods and services in an economy.In most systems of national accounts the GDP deflatormeasures the ratio of nominal (or current-price) GDPto the real (or chain volume) measure of GDP.

The formula used to calculate the deflator is:

Dividing the nominal GDP by the GDP deflator and

multiplying it by 100 would then give the figure forreal GDP, hence deflating the nominal GDP into a realmeasure.


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GDP deflator for India in 2008 - 7.2%

The GDP deflator is utilized as a measure of shifts inthe prices of goods and services that are produced ina given country.

It is understood that the GDP deflator can helpprovide a more accurate picture of the current statusof the gross domestic product within the country.Because the GDP deflator is understood to be anexample of an implicit price deflator for GDP,economists consider calculating this economicindicator as an essential component in ascertainingthe current strength or weakness of the countryseconomy.


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INDEX NUMBERSAn INDEX NUMBER measures the variation in the time series in a

period as a percentage of the time series in a base period.

LASPEYRES INDEX number measures the change in price for afixed buying pattern.

The LASPEYRES INDEX for the n-th period is obtained by the followingformula:

L=100 x pni q0i p0i q0i

PAASCHE INDEX number, measures the change in price for a fixedbuying pattern, in the case the quantity change from the base yearamount.

The PAASCHE INDEX for the n-th period is obtained by the followingformula:

P= 100 x pni qni p0i qni


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INDEX number, measures the averagechange in price for a fixed buyingpattern.

The INDEX for the n-th period is obtainedby the following formula:

For the above example, we have:

L1:0 = 100 x (776.06x102.1 +3345.56x1.8)/(562.48x102.1+2677x1.8) = 136.9616

P1:0 = 100 x (776.06x87.9 +3345.56x2.7)/(562.48x87.9.1+2677x2.7) = 136.3084

I= (Square root ofL * P)


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NEW SERIES ONNATIONAL ACCOUNTS STATISTICSWITH 1993-94 AS THE BASE YEAR

In the past, National Accounts Statistics have been reviseddecennially changing the base to a year in which decennialPopulation Census has beenconducted.

It was primarily because in the base year estimates, the

information on working force has played an important roleand working force estimates have been obtained from thepopulation census which are conducted decennially. In thissequence, the base of the National Accounts Statisticsshould have been revised to 1990-91 from 1980-81.

It may be mentioned that any major changes in the choiceof the alternative sets of data or methodologies areconsidered only along with the base year revision exercise.

It has been customary not to make changes every now andthen and necessary major changes are kept forimplementation at the time of base year revision exercise.


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In the present revision exercise, the CSO has mainlybeen guided by three considerations, namely;

(i) revision of base year to a more recent year

(for meaningful analysis of the structural changes in

the economy), (ii) complete review of the existing data base and

methodology employed in the estimation of variousmacro-economic aggregates including choice of thealternative databases on individual subjects, and

(iii) to the extent feasible, implementing therecommendations of the 1993 System of NationalAccounts(1993 SNA).


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Of the various methodological improvements/changes indatabases effected in the new series mention may be madeof the following:

Estimation of working force by economic activities using the

worker population ratio and the workforce participationrates estimates based on the quinquennial survey onemployment and unemployment conducted by the NSSO,1993-94 (50th round) and the total population as obtainedfrom the 1991 population census;

Coverage of the agricultural production in thefore/backyard, floriculture, deep sea fishing, valuation ofthe output of prawns and shrimps separately, data on whichis available from the Ministry of Agriculture;


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Estimating GDP relating to trading activities in the privateorganised segment of the economy using the working forceestimates available from DGE&T and inclusion of activitiesrelating to National Industrial Classification, 1987 (NIC)codes 840 and 841 (lottery sales, services) for the firsttime;

Coverage of public services in the quasi-government bodiesand

Contribution of Employees Provident Fund Organisation inthe GDP;

Estimation of the contribution of tailoring services (NIC964) separately;


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Interpreting National Income inBusiness

national income concepts-first 2

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